Real estate continues its slight recovery with housing starts and new residential permits on the rise in February. Most of the action was in rental housing, as apartment construction is up 9.9 percent YoY in February. Whereas February single-family construction has been falling and is now down 31.6 percent YoY.
It’s easy to see why more multi-family housing is under construction. Single-family affordability has plunged with 30-year conforming fixed rates still around 6.75 percent.
The NAR’s Housing Affordability Index showed that from 2020 to 2022 the income required to qualify for a 90 percent LTV mortgage on an entry-level home had doubled from $49,008 to $92,688 while the 30-year fixed rate rose from 3.17 percent to 6.77 percent.
This puts many more first-time buyers out of the market. Their share of purchases has fallen to 30 percent of existing-home sales, when it was as much as 40 percent before housing prices accelerated in 2021.
The Case-Shiller Home Price Index also highlights the price fluctuations in existing-home prices that made affordability such a problem in Calculated Risk’s above graph of the Case-Shiller Index dating from 1988.
Price rises peaked in January 2004 and January 2023 when they were rising as much as 20 percent YoY before declining sharply. It was a time of multiple offers and ultra-low interest rates that crowded out first-timers.
The sharp declines in price inflation that followed both times were precipitated by the Federal Reserve’s actions to tighten credit, and the lack of entry-level housing.
One reason that builders are building again is the slow down in inflation, with the S&P Composite Home Price Index now rising in the 4 percent range. There are also some 1.4 million home still under construction, which is a tremendous backlog also bringing down prices.
“The cooling in home prices that began in June 2022 continued through year end, as December marked the sixth consecutive month of declines for our National Composite Index,” says Craig J. Lazzara, Managing Director at S&P DJI.
Mortgage rates have been up and down but won’t give much boost to housing until the Fed decides to ease up on the rate increases. Still, signs of life this early in the selling season and without any indication the feds will pause in their rate hikes is difficult to ignore.
Harlan Green © 2023
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